Sunday, November 14, 2010

Why Pay More?

Like in every single negotiation, the objective of both parties is to get the most for the least amount of money possible. Just like every human endeavor, this natural tendency is at the core of Real Estate transactions, irrespective of who is involved. It is thus interesting when you analyze what happens when an agent engages a property owner to list and place his property on the market to sell or rent. Usually, the main point of contention involves percentages and benefits that agents seem to be conferring on themselves contractually and which some owners feel are unnecessary or at least worthy of negotiation. Interestingly enough, most of said elements on the listing contract are there, pre-written usually by the Florida Bar, to protect both parties from a myriad of complex occurrences that will really make your head spin if I started discussing them on this post. What I do want to point out though is the market/business/practical benefits/consequences of some of the most basic clauses in these contracts so that you can get an idea, if you are an owner, of why they are there and how they benefit YOU more than the agent himself in the end.


One of the most common issues when developing a contract is the percentages or pay terms for the agent if he finds a willing and qualified buyer/tenant (this amount is not one of the pre-written elements in the contract). The usual method of discussing this aspect of the contract is whether or not the owner feels like paying the usual 10% (for rent) or 6% (for selling). All sorts of creative ideas tend to occur to the owners when dealing with this aspect, trying to get the most from the agent with the least amount of pay. I have even heard caping the earning of the listing agent to a low amount unless he cooperates with another, or even putting clauses that imply that payment is contingent on a good relationship with tenant, etc.

What owners don't realize is that the payment that you are conferring on your agent has a direct relation to how many OTHER agents will be willing to promote your unit and get it sold/rented. Those of us who are Realtors utilize the Multiple Listing Exchange to market every single unit, and in it, we have to place our compensation and the one cooperating brokers will get for each property.

The owner MUST be made here to think logically and ask himself: Which property do I think will sell/rent the fastest? The one that pays the most, of course. Specially if you are not the only property with similar characteristics in the market (truly unique properties are almost non existent).

Now the owner may not see much of a difference in these numbers, a couple of hundred dollars at the most in the rentals and a couple of thousands maybe on the sales, but to the agents who move units every day, these amounts add up to a lot of money lost if they could have simply direct their clients to the units that pay a bit better and nothing is lost. In all honesty, and in my experience, the listings that pay more tend to have easier landlords/owners to deal with when negotiating than those that don't, which in the end is better for our clients anyhow (there are of course exceptions, since sometimes these low commission rates are really the fault of a lazy agent who didn't explain these issues to their client in a way that they can comprehend). At the end of the day, it is in the owner's best interest to at least pay the basic commission rates that other units are paying in their area so that they can compete and not be at a disadvantage from the starting gate.

Also, a LOT of agents do MLX searches that exclude units that pay below market, which means that your unit is basically non-existent from the get go.


Another point of contention in most listing contracts is the pre-written clause in rentals that gives agents the right to a renewal commission. This clause seems a bit expensive to many owners because they feel that once they have a tenant in their unit, the relationship with the agents should be over and thus they shouldn't pay anything more and deal directly with the tenant. But there is a reason for that clause. Technically, the only reason you have that person siting in your unit is because of the work of the agent/s. But, even when looking at it from a practical point of view, there is also the fact that most renters in Miami tend to move out and try new places after a year or two. Many of these use the same agents they used in the past, specially if the agent stays in touch. And if these agents are not getting paid a renewal for the unit that their client is in; what do you think they will suggest? Forget about it if they call a different one! If the agent is getting paid renewal they WILL call to confirm that they are renewing and collect their check, thus helping the process of keeping your tenant in place without having to go out again to get a new place.

From the owner's perspective, the trouble of having the unit rented again, is not only going to cost him the same commission anyway with new agents, they would also have to add the cost of having the unit empty while it is rented again, and now to experiment with a new tenant that they don't know as well, etc. When you take all of these dynamics into consideration, you should begin to realize that paying that possible renewal commission is not that bad of an idea after all.

On top of this, MANY agents also exclude from their searches in the MLX all units that don't pay renewal commissions, again taking your unit out of many possible leads.


There are of course, many examples of this type of situation, so as an owner/landlord you have to make sure that when you are making these economic decisions, you are not basically hurting yourself more than anybody else. Your job as an investor/owner is to make the most profit possible from your property, and to achieve this a good Realtor is crucial, and one of the most important characteristics that he/she must have is the ability to logically explain the consequences of your contractual actions. If you then make the decision to save a few dollars by limiting commissions or eliminating their renewal provisions, then at least you understand that you are taking a calculated risk in the entire enterprise.

For those of us who are Realtors, our job is to help our clients understand the dynamics of our business and help them get their goals fulfilled with the utmost speed and effectiveness possible. Letting our clients know how to achieve this contractually not only helps them, it helps you.

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